Plight of the unemployed around the world

Plight of the unemployed around the world

One of the most urgent questions in economics today is the connection between inequality and growth. That is because one of the big economic facts of our time is the surge in income disparity, particularly between those at the very top and everyone else.

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Image: A man, with a sign strapped to his back, uses a megaphone to attract the attention of potential employers as he hands out resumes on Bay Street in the financial district in Toronto, Canada.Photographs: Mark Blinch/Reuters

Plight of the unemployed around the world

The other big fact is the recession set off by the financial crisis and the consequent imperative to jump-start economic growth. Figuring out the relationship between these two tent-pole issues is therefore a good way for economists to spend their time.

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Image: A person dressed as a bunny walks down the street with a sign in New York City.Photographs: Shannon Stapleton/Reuters

Plight of the unemployed around the world

There are two main and contradictory ideas about how that relationship might work. One is that inequality is the price of robust economic growth. If the private sector is thriving, the most successful capitalists will be getting very rich.

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Image: A man holds a paper with a job offer which reads, 'You might want to', as he waits in line to enter a government job centre in Malaga, southern Spain.Photographs: Jon Nazca/Reuters

Plight of the unemployed around the world

There is, however, another theory, and it has been winning adherents in the aftermath of the financial crisis. In this view, rising inequality is not a symptom of a fast-growing economy or an incentive that will help create one.

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Image: Mehdi Kaveh, left, a candidate for casino dealer position at Golden Casino Group has his picture taken by Jef Bauer, Vice-President and General Manager, during a job fair in the Spot tavern in Golden, Colorado, United States.Photographs: Rick Wilking/Reuters

Plight of the unemployed around the world

Instead, too much income inequality crushes economic growth. There are different arguments for why that might happen. One is that high income inequality creates an unstable system that is vulnerable to costly booms and busts.

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Image: Charles Gates gestures while speaking with a potential employer during the Dr Martin Luther King Jr career fair held by the New York State Department of Labor in New York City.Photographs: Lucas Jackson/Reuters

Plight of the unemployed around the world

Another is that when too much of the income goes to the very top and not enough goes to the middle, spending slumps - how many yachts does a plutocrat need? - putting a brake on growth.

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Image: A man wearing a US flag necktie stands in line to talk to prospective employers at the National Capital Region Job Fair sponsored by Virginia Tech University at their branch campus in Falls Church, Virginia, United States.Photographs: Jonathan Ernst/Reuters

Plight of the unemployed around the world

David Howell, a professor of economics at The New School in New York, has written a draft paper for the Center for American Progress, a progressive research group, that investigates the first argument.

Howell argues that the United States and Britain have acted over the past three decades on what he calls the laissez-faire theory, that the equation of rising inequality and increasing gross domestic product is correct.

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Image: A job seeker looks for work at the near deserted Xintiandi employment centre, in Songgang town, Shenzhen, China.Photographs: James Pomfret/Reuters

Plight of the unemployed around the world

Howell tested that view by comparing the United States and Britain to their peers. He asked whether "compared to other rich countries, US income inequality has paid off in relatively high growth."

His answer: not particularly. He finds that "there is no simple correlation between our measures of growth and income inequality."

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Image: Student Miles Spencer, 17, receives feedback on his resume during an interview as part of work readiness training at the Los Angeles Area Chamber of Commerce in California.Photographs: Patrick T Fallon/Reuters

Plight of the unemployed around the world

That may come as a surprise to many Americans, who are accustomed to hearing, as Howell explained, "that the US middle class is doing relatively well, at least compared to Europe, because of productivity growth and because we allow higher inequality."

Plight of the unemployed around the world

"The US is anywhere from an OK to middling performer in the Age of Inequality," Howell said, using his term for our era. But while his work suggests inequality is not needed to get growth, he does not show that inequality actually hurts growth either: "I don't show a strong measurable inverse effect."

Plight of the unemployed around the world

His worry is financial instability. "The added savings of the increasingly affluent must be loaned to balance total current expenditure," he writes, "but increasing indebtedness implies financial fragility, periodic financial crises, greater volatility of aggregate income and, as governments respond to mass unemployment with countercyclical fiscal policies, a compounding instability of public finances."

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Image: Job seekers prepare for career fair to open at Rutgers University in New Brunswick, New Jersey, United States.Photographs: Mike Segar/Reuters

Plight of the unemployed around the world

This is a variation of an argument by Raghuram Rajan, a politically center-right professor at the University of Chicago, who has suggested that rising income inequality was one of the drivers of the financial crisis.

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Image: People wait in line looking for jobs during a Job Fair at the Miami Dade College in Miami, Florida, United States.Photographs: Carlos Barria/Reuters

Plight of the unemployed around the world

Both Howell and Osberg are skeptical, at best, of the value of rising income inequality as a driver of economic growth. When you put that conclusion together with the arithmetic of democracy - rising income inequality means a majority of voters are on the losing end of the deal - a political backlash seems inevitable.

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Image: People march in the Charlotte Labor Day Parade in Charlotte, North Carolina, United States.Photographs: Eric Thayer/Reuters

Plight of the unemployed around the world

"Go back to the 1920s or the 1870s and economists were worried about the stability of the capitalist system," Osberg said.

"One of the things the 1930s experience teaches us is there are some catastrophic outcomes which can happen."

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Image: Chamika Chandler, left, waits to be interviewed for a waitress or bartender position at a job fair at the Foxy Lady Gentleman's Club in Providence, Rhode Island, United States.Photographs: Brian Snyder/Reuters

Plight of the unemployed around the world

The investing class and the academic world are focused on those dangers. "Can capitalism survive?" is one of the trendiest conference topics among red-blooded capitalists and left-leaning professors alike.

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Image: A jobless mother holds her child as she offers to be a 'car jockey' in a main street in Jakarta. Many unemployed Indonesians find work as 'car jockeys', for which they are paid around $1.50 to be car passengers, allowing the driver to use a lane dedicated to cars carrying three or more passengers.Photographs: Beawiharta/Reuters